Introduction

The decisions by governments in many countries to curtail the spread of the Coronavirus, otherwise known as COVID-19, has had far reaching effects on the global economy. Many businesses have had to stop operations or adopt the approach of virtual working. As a result, business activities and resulting cash flows have been significantly interrupted which is already resulting in some major economic downturn.

To respond to this situation, many governments have offered certain reliefs to businesses. In addition, parties to contracts are beginning to renegotiate contract terms for reliefs and concessions. One of such reliefs or concessions is providing some relief regarding rent holidays and temporary rent reductions.

The grant of reliefs and concessions has therefore triggered some accounting issues to which the International Accounting Standard Board (IASB) has provided certain responses. In May 2020, the IASB issued amendments to IFRS 16 on Leases to address the accounting and reporting issues arising from the rent concessions provided to lessees as a response to the COVID-19 Pandemic.

The amendments to IFRS 16 – COVID-19 Related Rent Concessions are as follows:

Lease Modifications

The amendment requires that the application of the changes is practical expedient and voluntary. The requirement for "practical expedient" clause applies only to rent concessions occurring as a direct consequence of the COVID-19 Pandemic and only if all of the following conditions are met:

  • the change in lease payments results in revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately preceding the change;
  • any reduction in lease payments affects only payments originally due on or before 30th June 2021 (for example, a rent concession would meet this condition if it results in reduced lease payments on or before 30th June 2021 and increased lease payments that extend beyond 30th June 2021); and
  • there is no substantive change to other terms and conditions of the lease.

Hence, a lessee may elect not to assess whether a rent concession that meets the above conditions is a lease modification.

Disclosures

The amendment stipulates that if a lessee applies the "practical expedient" above, the lessee shall disclose:

  • that it has applied the "practical expedient" to all rent concessions that meet the conditions above or, if not applied to all such rent concessions, information about the nature of the contracts to which it has applied the practical expedient; and
  • the amount recognised in profit or loss for the reporting period to reflect changes in lease payments that arise from rent concessions to which the lessee has applied the "practical expedient".

Transition and Effective Date

  • Lessees will apply COVID-19 Related Rent Concessions retrospectively, recognising the cumulative effect of initially applying the amendment as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the beginning of the annual reporting period in which the lessee first applies the amendment. In the reporting period in which a lessee first applies the amendment, the lessee is not required to disclose the information required by paragraph 28(f) of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
  • Lessees will apply the amendment for annual reporting periods beginning on or after 1st June 2020. Earlier application is permitted, including in financial statements not authorised for issue at 28th May 2020.

Conclusion

The response of IASB on how to account and report rent concessions is timely. The amendment will assist entities dealing with similar reliefs and concessions in the course of their financial reporting activities.

The relief applies to lessees only. Lessors are required to apply the existing requirements of IFRS 16. It should be noted that the application of the amendment is only for the relief provided as a result of the COVID-19 Pandemic, not to all concessions. The key focus of this amendment is that lessees do not have to account for the rent concession as lease modification.

In our view, lessees may need to perform impairment test on their right-of-use assets resulting from the leases. This is because the declining business revenue and various economic measures adopted by the governments are indicators of impairment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.